Wealth through health

SMART TALK

The healthcare services delivery sector comprising big organised hospitals like Apollo, Wockhardt, Escorts, Lilavati and Hinduja has been on a growth path.

As medical tourism gains ground, revenues from foreign patients, which account for 10-15 per cent of the total, are expected to contribute a significant chunk going forward.

Apollo Hospitals, a leading player in the sector, saw a consolidated turnover growth of 16.5 per cent of Rs 770 crore for FY06 and a net profit growth of 35 per cent to Rs 47 crore. The turnover has grown by 67 per cent over the past three years, while the net profit has climbed up by over 145 per cent.

In Q1 FY07, the company posted a 30 per cent y-o-y growth in turnover and a 23.6 per cent growth in net profit. Apollo's stock price has appreciated by over eight per cent over the past month.

Analysts clearly see medical tourism as one of the drivers for the health care service sector, with patients enjoying about 60 per cent savings in treatment costs in India as compared to their home country.

Other major factors driving the sector include networking and value added services, attempts to expand geographical reach and lifestyle diseases associated with the current urban lifestyle. On trailing 12 months earnings, the stock trades at 34.9x, while according to analysts' estimates, it trades at 16.1x on FY07E earnings.

Suneeta Reddy, executive director-finance, Apollo Hospitals Group talks to The Smart Investor about growth strategies.

What growth do you foresee in the health care sector in India, across different segments, in the coming five years?

The healthcare services delivery sector is in its infancy stage with rapid growth potential. Sector growth will clearly outstrip GDP growth by a few percentage points. The latent healthcare demands are unmet due to lack of third-party payers like insurance companies.

This penetration is a meagre 2 per cent or thereabouts. If the health insurance penetrates to about 10 per cent or so, there would be a releasing of "capacity to pay" constraint, which should unleash the huge pent up demand. Indian citizens today have no access infrastructure, which has to be built up and precede physical infrastructure.

How much do foreign patients contribute to your total revenues? What growth do you expect in the same?

Our foreign patients in volume and value contribute to just under 10 per cent today. We expect demand to be robust in this segment.

The drivers for such growth are a huge waiting list in developed countries, large under-insured or non-insured population and the opportunity for at least 10 major low risk tradable medical procedures as described by WHO authors (who have indicated the figure at $2 billion that can come to India).

Moreover, India is developing as a brand and the positive trend among the lay public in Asian and western countries is improving discernibly in the past few years.

Vastly improved medical infrastructure and highly specialised skill sets of Indian clinicians are other positives. The international standards that we practice in our hospitals and the English speaking population are natural assets. A well-developed pharma sector also helps.

How much does foreign income contribute to your total revenues at present and what are your targets?

There are two categories of foreign income, viz. management income and income from hospitals abroad. In the year ended March FY06, we generated a foreign management income of Rs 5.12 crore and our Sri Lankan hospital touched a turnover of Rs 80 crore.

However, as it is an associate, we do only equity consolidation and not line by line consolidation.

Apollo has not invested in setting up any hospitals abroad except for its facility in Colombo, Sri Lanka. Apollo's consultancy division is developing relationships mostly in the management mode and investments are an exception rather than the rule.

What are your strategies going forward?

We plan to consolidate in the tertiary care market in India in the following specialities: cardiology & cardiothoracic, orthopaedics & trauma, neurology & neuro sciences, oncology, radiology and imaging.

Currently, we are also planning to emulate world trends by setting up ambulatory surgery centres and also a chain of secondary care hospitals based on the First Med model.

Besides, we are also setting up a central referral lab, thereby leveraging our partnership with John Hopkins International. The benefit of this tie-up would be made available to all our 40 odd owned and managed hospitals across the country.

Acquisitions would be made on an extremely selective basis, based on the potential targets in terms of strategic fit, operating and EBITDA margins and, of course, growth potential in key geographic locations.

Do you fear cost pressures building up in future due to higher overhead expenses?

Input costs such as materials, manpower and facility have been rising steadily. However, they are well-managed and monitored and there is nothing in them that we do not understand, as we have over two decades of experience.